Heemskirk Consolidated (ASX: HSK) began 10 years ago as another Australian junior focused on base and precious metals. It held stakes in operating mines, including a tungsten operation it sold for US$14 million, but along the way identified a pathway to potentially greater success in Canada’s industrial minerals industry. Heemskirk is now redeveloping an existing silica mine into a high-quality frac sands operation, with great logistics and long-term prospects.
A fresh approach
Heemskirk made a strategic investment in the Moberly flint-grade silica sand mine and processing facility, near Golden in British Columbia, back in mid-2005. Over the years that followed, this 30-year old silica business continued to generate cashflow in the background as Heemskirk pursued more traditional mining investments. Things continued like this until around 2011, when the company decided to redevelop Moberly to produce higher-margin frac sands products – used particularly by unconventional oil and gas producers.
Peter Bird, one of Heemskirk’s founding directors, was appointed Managing Director in December 2011 to lead the company in its new focus. He explains that the change in direction was led, at least in part, by an effort to escape the tumult of the base and precious metals markets.
“We identified industrial metals as long-life, high-margin assets that, unlike the more commonplace, cyclical commodities, seem to be much more even in their pricing behaviour,” says Peter.
“While we’re developing the Moberly Frac Sands Project, we’ll still be affected by the vagaries of equity market behaviour. But, theoretically, once the asset is developed it should be a stable source of income.”
The reason Heemskirk is able to develop frac sands production at the Moberly mine comes down to the high quality of the resource, which is almost 100% silica and meets American Petroleum Institute (API) standards.
It’s also a very large deposit, with a total Measured and Indicated resource of 37.5 million tonnes with an estimated 70% frac sand. Heemskirk plans to sell the product to Canadian oil and gas companies operating in the Western Canadian Sedimentary Basin, of which there are plenty.
“The Moberly project is almost in the western centre of that activity, and it’s located on Highway 1 as well as the Canadian Pacific railway line, so it has a real logistical advantage,” says Peter.
“The majority of frac sand consumed in this part of the world currently comes from the US, so we’ll provide a closer alternative.”
Heemskirk’s proposed frac sands operation will comprise two stages. Stage 1 will include the construction and operation of a 300,000 tonnes per annum (tpa) frac sand plant, while Stage 2 will expand production, possibly to 600,000tpa. The resource is large enough to support a 60-year mine life at the Stage 1 production rate, and a 30-year mine life at the proposed Stage 2 production rate.
Stage 1 will have a capital cost of US$26.6 million, and an ungeared project internal rate of return of 33%. The payback period is estimated at 2.9 years, and the project ungeared net present value at C$78 million (US$56 million). The estimated terminal value of Stage 1 only is estimated at up to US$360 million.
The road ahead
Heemskirk has secured a funding package from Taurus Funds Management comprising US$25 million for Stage 1 construction and production development, and US$15 million for the Stage 2 expansion. The company is currently meeting the final requirements for the debt package and completing a A$10 million (US$7.18 million) rights issue to help fund the development.
Peter says Heemskirk expects to complete these endeavours in time to restart construction in January. “We’ve already completed the foundations of the process facility using our own resources, so that we could make a start outside of the winter period,” he explains.
“Once we’ve closed off on the debt funding criteria, we’ll fully initiate on construction and complete that on time and on budget, within 14 months. Once that’s done and it’s operational, we’ll start to consider more seriously what the expansion options are.”
He adds that the Moberly deposit is so large that the size of the expansion will ultimately depend on the market environment at the time – about which he’s optimistic. “At the moment, we see the consumption of frac sand growing, and in the long term we believe there’ll be an overall shortage of the product.”
Peter concludes that while Moberly is Heemskirk’s entire focus at the moment, it won’t necessarily be that way forever.
“Moberly is a very good project and a very high return project, so it’s incumbent on us that we build and commission it efficiently, so that we’re generating good cashflow for shareholders. That will then give us the ability to look at other opportunities.”
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